Amaya (AYA, Financial) is the parent company of Pokerstars, the world’s leading online poker platform. The company reported a strong quarter in the recently released earnings results with significant increments in revenue, net income and EBITDA.
However, Amaya has also been facing various legal challenges including an ongoing lawsuit that emanated from former CEO David Baazov's insider trading activities. The gambling industry is one of the trickiest in the financial markets especially due to varying regulations including taxation differences in various countries as well as conflicting requirements on the legal frameworks.
However, from a stock trading perspective, everything is pretty straightforward, which means that Baazov is subject to the full force of the law provided under insider trading.
As it stands, the company is facing a series of lawsuits in connection with the former CEO’s trading activities, and various attorneys have notified investors of the same reminding them of the deadline date in the class action lawsuits against the company.
The reminder is specifically made for those investors who purchased shares of Amaya between June 8, 2015 and March 22, and it requires them to file a lead plaintiff motion in the class action filed on their behalf by May 24.
However, Amaya has a lot of good stuff to look at beyond the current legal issues. First, the company reported a strong quarter, which seemed to justify its current good run that has seen the stock price rise from about $12.00 per share to about $13.80, representing a 15% increase in value over the last two weeks.
Illustratively, the company’s revenue for the first quarter of 2016 increased by 6% while EBITDA gained 8.7%. This included a massive impact from foreign exchange translations. When Forex translations are excluded, the company would have reported a revenue increment of about 14% year over year.
On the other hand, Amaya reported a massive jump in net income and earnings per share. The company’s income from continuing operations for the quarter increased by 138.5% to $55.4 million from last year’s figure of $23 million while adjusted net income was up 26% to about $85 million.
Amaya also reported a strong improvement in diluted EPS rising by 141.8% to 28 cents while adjusted earnings per share came at 43 cents, representing an increment of 27.8%.
The company’s special committee and board of directors, in consultation with the audit committee, deemed it inappropriate to provide guidance on the financial performance for the year 2016. As such investors will have to rely on analyst estimates and current financial data to evaluate their investment decisions.
Looking at the company’s current financial figures, it looks like a good stock to own despite the recent challenges.
Amaya currently trades at just 8.07x in P/E ratio for the trailing 12-month period, and it continues to enjoy impressive profitability margins. The company has an operating profit margin of 19% while its net profit margin stands at 21%.
Based on performance during the last 12 months, the company’s stock price has declined 47.25% whereas the Standard & Poor's 500 Index is down just 3.47%. As such, this provides a potential case of underpricing especially given the company’s recent quarter results and its healthy profitability margins.
So should you overlook Amaya’s ongoing action lawsuits?
The action lawsuits are meant to compensate investors for losses incurred on their investments made during the June 8, 2015 to March 22 (both dates inclusive) period. This will definitely result in some serious cash outflow from the company.
Illustratively, Amaya’s shares dropped from $26.84 per share, the closing price of the stock on June 5, 2015 (the Friday close before June 8, 2015) to a price of about $9.89 on Jan. 28. As of March 22, Amaya’s stock price traded at $14.25 per share.
This means that investors who bought the shares on June 25, 2015 and sold at a loss on Jan. 28 could receive as much as $16.95 per share worth of loss compensation, which at the moment is more than the current price of the stock.
While Amaya is set to get a hit on its cash balance, the company is clearly well set for a continuous run of positive cash flows backed by its strong profitability margins and a rapidly growing online gambling industry.
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